Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Blockbuster Still Doesn't Get It

Blockbuster gears up for an ill-fated digital download service.

It was really only a matter of time before Blockbuster(NYSE:BBI) threw its hat into the digital-flick delivery business. Rival Netflix(NASDAQ:NFLX) has been pointing to a January announcement for a few months now, and dot-com heavies like Amazon.com(NASDAQ:AMZN) and Apple(NASDAQ:AAPL) began selling video downloads last quarter.

However, troublesome signs here indicate that Blockbuster isn't in tune with what consumers want. Speaking at the Reuters Media Summit yesterday, Blockbuster CEO John Antioco began to flesh out what the company's digital strategy is likely to entail.

Please tell me that he didn't just say what I think he said? Too late. He said it. Antioco feels that consumers want one more gadget wired into their home theater systems. He points to MovieBeam as "an interesting model" that the company may be emulating, but doesn't stop to realize why MovieBeam has never gained any kind of traction.

For starters, you have a box to sell or subsidize. MovieBeam's box sells for $100 to $200. It comes preloaded with 100 movies. The service is convenient on the surface. The films start right away (as opposed to the sometimes lengthy download times through on-demand Internet delivery) and they do show up on your television without a lot of fuss. If you want to catch a film, it's $3.99 for new releases (and half as much for older titles) and you have 24 hours to watch them.

Strike one, of course, is the expense for the new box. It would cost you about a year of unlimited rentals at Netflix or Blockbuster Online just to pay for that box -- not a very compelling value proposition. Then you have the perceived value of going through just four new releases a month to equate a free month of unlimited mail-delivered rentals. Sadly, the economics don't work. If Blockbuster decides to subsidize the boxes by giving them away and clinging to the hope of making it up in rental royalties, creditors would turn in their freshly dug graves. The hurdle is too high, no matter where you place it.

The second strike comes from the limited selection: 100 preloaded titles? MovieBeam replenishes the supply by replacing as many as 10 films every week with new content, but it's still just a hundred movies. If slim pickings will satisfy your hunger, you don't need MovieBeam -- your digital cable provider's video-on-demand service will suffice.

Strike three? That happens if the first two obstacles don't sink Blockbuster's entry via pre-loaded set-top boxes. See, Blockbuster's hoping to make a difference here through its customer data. It doesn't have to feed the same films to every box. It can make sure consumers get the kind of films that they like. That's a respectable notion, but what's the name of that company that has been mining online data -- deeper and broader -- for a few years now? That's right: Netflix. If this works, Netflix will be able to offer the advantage of more user-ratings data than Blockbuster.

2007 is now just weeks awayIn fact, this may be part of the Netflix strategy anyway. Two years ago, TiVo's (NASDAQ:TIVO) CEO stepped down from the Netflix board because the two companies had announced the start of a partnership to develop video on demand functionality. January's announcement out of Netflix may not involve TiVo. It may not even involve a set-top box or a DVR with MovieBeam-esque functionality. However, if Netflix does take this approach -- one that is still flawed, given the first two strikes -- where does that leave Blockbuster? Life can get pretty tough when the "value-added" advantage you were banking on proves as sturdy as a marshmallow.

Either way, I can applaud Antioco for at least making a commitment to digital delivery. I just hope that he's seriously bringing more to the table than just a flawed model that's already in the marketplace. That wouldn't be Blockbuster's first mistake. Unfortunately, though, it could prove to be its last.

Longtime Fool contributor Rick Munarriz has been a Netflix subscriber -- and shareholder -- since 2002. He also owns shares in TiVo. He is part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.

Author

Rick has been writing for Motley Fool since 1995 where he's a Consumer and Tech Stocks Specialist. Yes, that's a long time with more than 20,000 bylines over those 22 years. He's been an analyst for Motley Fool Rule Breakers and a portfolio lead analyst for Motley Fool Supernova since each newsletter service's inception. He earned his BBA and MBA from the University of Miami, and he splits his time living in Miami, Florida and Celebration, Florida.
Follow @market